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Saturday, 10 July 2010

Stretch your arms out to either side and imagine you’re looking at the economic growth of the human race over its entire four thousand year documented history. From the fingertip on your right hand to the first wrinkle on its index ftinger more or less covers the first three thousand eight hundred years. From there to the end of the index finger on your left hand represents growth over the nineteenth and twentieth centuries.

We truly live in an age of miracles and wonders. Medical advances have ensured more people live longer than ever before, scientific achievements have created a world in which we’re surrounded by astonishing labour saving creations and inventions which allow us to waste the time we’ve saved and the extra years of life we’ve been granted. Meanwhile our economic understanding of how this happened has, well, gone nowhere very interesting really. How did we achieve this state of grace?

Science and Medicine

One thing’s perfectly clear – the massive economic growth seen over the last couple of hundred years doesn’t have an awful lot to do with economics. Perhaps the prevalence of capitalist doctrines has prevented excessive government intervention in free markets at too early a stage, but otherwise we’ve veered about wildly while booming and busting our way to a greater level of wealth and health than ever before seen on the planet.

On the other hand this has had a lot to do with medical advances. Medicine has ensured that our useful lives are greatly extended – although a lot of the increase in average lifespans so often discussed is down to vast decreases in infant mortality. Still, we no longer die en-masse of septicaemia. Better, though, improvements in healthcare have extended the useful working lives of people: imagine a world in which most people were dead by 45. Heck, no politicians.

From Third World to First

Along with this we’ve seen incredible advances in science and engineering. In my father’s living memory he recalls the arrival of electricity, sewage disposal and tarmac to his home village. My grandmother was born before the Wright Brothers took flight and outlived – by far – the Apollo program. Yet her grandfather lived in a world virtually unchanged for a millennium: a world of hard labour in fields, wind powered ships, hunger, poverty and incessant church attendance.

Living in a first world country in which innovation is the norm and in which our children live in the moment, twittering and texting their days away, it’s often hard to realise that what we experience today is not normal, it’s a unique experiment in life. Most people for most of history have lived lives of unremitting poverty and backbreaking work and their voices are mostly lost in a view of history written by the victors – the wealthy, the powerful and the educated.

Yet, if this is not normal then something, somewhere changed early in the nineteenth century. For economic growth to move from a fingertip of one hand to a fingertip on the other in a few generations there must have been some catalyst and some ignition point. Somewhere in recent human history a set of tumblers fell into place, a lock clicked open and the world exploded into a frenzy of unheralded opportunity. What happened?

The Birth of Plenty

There are lots and lots of theories about this, but one of the most interesting ideas comes from William Bernstein in his book, The Birth of Plenty. He makes the case that for global growth to take off there needed to be a combination of factors which had to come together to trigger it: ease of transportation and communications, ready availability of large quantities of capital, an environment supportive of scientific and technological experimentation and iron clad property rights. When all of these finally happened at the same time, first of all in the city states of Italy, then in the polders of the Netherlands and, finally, in nineteenth century England economic growth exploded.

The thing is, if this is correct, then the maintenance of growth is dependent on a continuation of these factors. As we’ve seen this isn’t guaranteed: increases in energy costs and the potential for a breakdown in global transportation networks threaten the world’s ability to maintain growth. Indeed, Bryan Ward-Perkins argues that this has happened before when the collapse of the Roman Empire in the 5th century caused chaos in globalised Britain:

"Almost certainly the suddenness and the catastrophic scale of the crash were caused by the levels of sophistication and specialisation reached by the economy in Roman times. The Romano-British population had grown used to buying their pottery, nails, and other basic goods from specialist producers, based often many miles away, and these producers in their turn relied on widespread markets to sustain their specialised production. When insecurity came in the fifth century, this impressive house of cards collapsed, leaving a population without the goods they wanted and without the skills and infrastructure needed to produce them locally. It took centuries to reconstruct networks of specialisation and exchange comparable to those of the Roman period."

Of course it couldn't happen again, could it?

Capital, Innovation and Property Rights

Bernstein's four factors are under threat in other ways as well. Our recent problems with capital markets have revealed starkly how dependent the world economy is on a functioning system for raising capital. When this fails then so does the ability of the planet to generate growth – capital is the lifeblood of our economic system. So on one hand the way that this system has been captured and hollowed out by vested interests is of concern, but so is the way that governments respond to this challenge: attack the capitalist fat-cats too much and you threaten the ability to generate future growth.

Scientific and technological innovation is increasingly dependent on networks of ideas yet as we’ve seen the Tragedy of the Anti-Commons, the use of intellectual property to restrict the free-flow of ideas, is a real risk. Reform of systems of IPR are called for to ensure that inventors get a fair reward for their innovations while ensuring trolls can't exert rent-seeking tolls on networked inventions.

Meanwhile property rights are always and everywhere under threat. Without a guarantee that the fruits of their labour will be protected and rewarded people have no incentive to seek to achieve anything. This extends to our personal freedom as well as honouring our rights to physical and intellectual property. Where governments conspire to restrict and deny these rights economic growth will falter and eventually fail.

Freedom and Apathy

Implicated in this is the freedom of the press to publish the truth about government malfeasance. Anywhere these rights are restricted we should be concerned – whether it’s the international extension of libel laws in the UK, a ramp-up of anti-terror laws in the US or the enforced censoring of search engines in China. It all poses a threat to our future economic well-being, the more so as the business case for the traditional press is being undermined by the Internet. Fortunately this move is being balanced by a return to the days of the scurrilous back-street scandal sheet, aka blogging.

These challenges are nothing new, we’ve faced them year in and year out ever since the blue touch paper of economic growth was lit somewhere back in Renaissance Italy. However, we now face different problems – the end of cheap fossil fuel energy, the rise of international terrorism, the perverse incentivisation of the capitalist masters of the universe, the vast interconnectedness of everything and the all-encompassing opportunity and risk of the internet.

These are genies that can’t be rebottled, but it behoves all of us to fight for the things that matter. There’s no longer an excuse for being silent because we can express ourselves in a thousand different ways. Even if our message only touches a few people that’s better, by far, than sitting back and letting things happen. The only danger to our children’s economic future is our apathy, everything else will sort itself.

7 comments:

One thing’s perfectly clear – the massive economic growth seen over the last couple of hundred years doesn’t have an awful lot to do with economics.I have to say I don't understand this statement. It has everything to do with economics. Why is China so poor? Why did the Middle East stagnate? Both would have been chosen as recently as the 1600s to lead the world in economic terms. No one would have chosen Britain and certainly not the U.S.I thought it was beyond debate at this point that the free market system and its embedded incentives has been the greatest wealth creating machine ever seen. The strongest incentive of all was the opportunity to come to a country where the economic system allowed unparalleled opportunity. In fact, it is so successful it has led to other problems. But that's a whole different issue.

I think it might be that success itself creates the conditions that lead to its collapse. People who lead softer lives do not fight as hard to move ahead. In all sorts of ways.

On the other hand, people with their backs to the wall fight like the blazes. So maybe it's a cycle thing.

I tend to think that this economic crisis will either make us or break us. To survive it, we will need to make dramatic changes. If we make those changes, we will move to places we cannot imagine today. I see it as sort of a society-wide gut check.

I have to say I don't understand this statement. It has everything to do with economics.

Loose language on my part. The idea was to compare advances in scientific and medical knowledge and their practical applications with those in economics. We've made great advances in the former which have helped raise our standard of living immeasurably but our understanding of how this works and how to control it has lagged behind. Or something like that ...

Great piece. And if you really distill your anti-apathy manifesto into a prediction, then there is going to be a major rally off the ropes for the equity markets at some point. Because it's in the equity markets where that resilience, innovation, and wealth creation gets underwritten... You may also want to weigh in on the concept of productivity and risk taking appetite and how that has provided a backdrop for the world of "plenty".

I recently read (and recommend) "The Science of Liberty", by Timothy Ferris. The book's main contention is that science requires liberty (in an English Liberal sense) in order to exist; freedom of speech, publication, and thought are the essence of the enterprise, after all. As a corollary, Liberal conditions are bolstered by the unrivaled success of the scientific schema, which leads to wealth and temporal power.